Rental income transferred to unmarried partner

[revm]

Hi there,

I would be extremely grateful for any assistance.

We are planning to move early next year and let out our current property. I own the property 100% and am the only name on the mortgage but as a higher rate tax payer I would like the rental income to go to my partner. I understand that I can gift my partner 1% of the house and then draw up an agreement that she receives 100% of the rental income.

1) Does this sound correct?
2) Do I need to do a "Transfer of Equity" or can I do a "Declaration of Trust" to grant her the 1%? Is there a preference?
3) The mortgage company said they don't need to be involved! Is that right?

Much appreciated,
Ross

[section 44]

1) Does this sound correct?

Provided that your partner would be a joint legal owner of the property then this should be consistent with HMRC's published guidance. If your partner was not a joint legal owner then there is greater uncertainty with regards to HMRC's published guidance on this.

2) Do I need to do a "Transfer of Equity" or can I do a "Declaration of Trust"

What's the difference in a "transfer of equity" and "declaration of trust"?

3) The mortgage company said they don't need to be involved! Is that right?

They would need to be involved in any transfer of the legal interest (see my comment at 1). Otherwise, this would depend on the terms and conditions of your mortgage - clearly I haven't read these.

[revm]

Thanks for responding, based on your comments I think my question really is:

How do I make my partner a joint legal owner while only gifting her 1% (if I gift much more I could bother CGT limits)?

Does Joint Tenant or Tenants in Common have any bearing on this?

[section 44]

How do I make my partner a joint legal owner

Transfer the legal interest in the property from you to you and your partner - this would require the mortgagee's involvement

while only gifting her 1%

As part of the above, declare that you, and then you and your partner, hold the property on trust for each of you as tenants in common in the proportions 99:1

Does Joint Tenant or Tenants in Common have any bearing on this?

Indeed. Joint tenants each and together own the whole of the interest and legally property can only be co-owned as joint tenants. Tenants in common have separate proportionate shares of the property. In equity, property can be co-owned either as joint tenants or tenants in common.

[revm]

Thanks so much for your help. I'm nearly there, i think the semantics are confusing me...

When you say "transfer the legal interest" by becoming tenants in common 99:1 that will have been achieved right?

And finally, to confirm, she will be able to receive 100% of the rental income? We plan to have a separate account out of which she receives all rental income and pays all btl related bills/taxes, I think that should make it clean.

Do you have a beer fund I can contribute to?

[section 44]

When you say "transfer the legal interest" by becoming tenants in common 99:1 that will have been achieved right?

Not necessarily. For example, you could continue to be the sole legal owner of the property, holding it on trust for you and your partner as tenants in common in the shares 99:1 (i.e. your partner doesn't have to have any legal interest in the property in order to have a beneficial interest in it).

she will be able to receive 100% of the rental income?

Yes if that's what you agree

[revm]

Brilliant, thanks, I have one last question:

Am I correct in thinking my CGT liability will be based on the 1% share that I gift my partner. The income allocation won't come into it.

Thanks again,
Ross

[section 44]

Am I correct in thinking my CGT liability will be based on the 1% share that I gift my partner. The income allocation won't come into it.

Correct. CGT is only concerned with beneficial ownership - here your partner's beneficial interest in the property would be 1%.

[Ian McTernan CTA]

I do wonder sometimes why HMRC don't attack more of this sort of arrangement under the settlements legislation.

[section 44]

I do wonder sometimes why HMRC don't attack more of this sort of arrangement under the settlements legislation.

Indeed.

This topic arise frequently but I don't recall ever reading of situations where taxpayers or advisers have actually engaged with HMRC with regards to the comments in the property income manual.

...perhaps the comments in the property income manual might at least provide some sort of legitimate expectation for a taxpayer if HMRC were to challenge on the basis of settlements legislation